Interest Rate Responsiveness of Investment Spending in Bangladesh

Shamim Ahmed and Md Ezazul Islam
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Shamim Ahmed: Research Economist, Policy Analysis Unit (PAU), Research Department, Bangladesh Bank, Dhaka, Bangladesh
Md Ezazul Islam: Research Economist, Policy Analysis Unit (PAU), Research Department, Bangladesh Bank, Dhaka, Bangladesh

Bangladesh Development Studies, 2004, vol. 30, issue 1-2, 65-110

Abstract: Bangladesh initiated the Financial Sector Reform Programs (FSRPs) at the beginning of the 1990s. One of the objectives of this comprehensive program was to provide better return on deposits and allocate credits efficiently in the financial market by moving towards a market based interest rate regime from an administered interest rate regime, thereby promoting economic growth through increased investment spending. In this connection, the paper empirically investigates whether interest rate liberalization pursued under the FSRP has been able to create a competitive environment in the financial market where investment spending at the aggregate level as well as in disaggregate terms is responsive to the respective lending rates. Using quarterly data set for the period of October-December 1979 to April-June 2005, an assessment of empirical evidence has been established through the unrestricted vector autoregressions (VARs) approach. The results of the empirical analysis suggest that investment spending at the aggregate level is non-responsive to interest rates. Besides, investment spending at the disaggregate level is still not responsive to interest rates except for private sector investment category which is only moderately responsive from the lenders’ point of view in the short-run. These results have important policy implications for both domestic policy makers and the development partners in assessing the achievement of the objectives of the FSRP and taking further policy actions.

Keywords: Interest Rate Responsiveness; Investment Spending; Bangladesh (search for similar items in EconPapers)
JEL-codes: A10 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (2)

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